Creative destruction and business cycles

Abstract

In a dynamic general equilibrium setup, this paper aims at providing a general framework for the analysis of the role of vintages and creative destruetion on business fluctuations. By stressing the forward-looking behavior of the optimal scrapping rule, we use a standard rational expectations argument to show) in the linear utility case, the time independence of the scrapping function. Secondly, we prove that equilibrium output shows a purely periodic behavior around an exponential growth trend, the pattern of the cycle being deterrnined by the pattern of initial conditions. The vintage capital model presented in this paper provides a new view on business fluctuations: historical conditions are at the basis of business fluctuations, in the sense that historically volatile or stable econornies will reproduce their own historical pattern in the future.